Debt consolidation is such an appealing phrase to consumers who are in debt. It gives the perfect picture of coming up with a single loan for different balances, making the debt easier to handle through a more manageable payment scheme. However, you should check the dangers of debt consolidation before jumping onboard. It may look like a quick fix, but the truth is it’s not.
Debt consolidation is more of a band-aid solution than a permanent fix. It is like fighting fire with fire because there is no specific gain from it. The dangers of debt consolidation include a snowballing effect, which is in contrast to its initial impression of being manageable. Debt consolidation comes in many forms, from debt-consolidation loans, to home equity loans, to balance transfers. This procedure can be packaged under an exciting offer, but it still gives the same effect.
Being in a deep pool of debt clouds your judgment and will create a tendency for you to go overboard and find easy-looking solutions. However, if you can deliver a sound decision and you consider yourself as a disciplined individual even if this looks like the end of the line for you, then debt consolidation can be considered despite its risk to implode into massive crisis.
Here are some of the recommended options that you may utilize:
Home Equity Line
This option is considered as one of the quickest and easiest ways to get out of debt if you know what you are doing. By leveraging on your residence’s value, you can actually earn money, pay off other bills, and acquire a tax break as well. However, this is also the riskiest option as you can actually lose your house if you fail the terms and default on your loan. Also, it could not work in every situation. While equity loans are generally tax deductible, they still cover a large amount of risk.
The bank will determine how much you can loan, and one most common dangers of debt consolidation using this route is that people are tempted to loan the maximum amount and ultimately end up defaulting.
Credit Cards with Zero-Percent Feature
Of course not everyone owns a house. Most people turn to credit cards with a zero-percent feature in the attempt to reduce debt. It might work, with discipline and prudence. The rates are irresistible and can effectively entice consumers who would like to consolidate debt. However, credit card companies are more in favor of consumers with better credit standing, so those in the deeper end of a debt problem might not be able to utilize this option.
Even if you initially qualify for this feature, it does not last forever. The rates can only last for a certain amount of promotional duration and will change with or without prior notice. Also, low rates only last when you give punctual payments. If you will pay beyond the due date, even for just one time, the interest rate will shoot up.
In considering the zero-percent facility, always check for hidden charges and terms because you might end up having more debt.
Loan for Debt Consolidation
The computations for the first two options can be overwhelming. You can also try a debt consolidation loan. This option is one of the most publicized options online, and there is a good chance you have received one in your e-mail. The biggest selling point of a debt consolidation loan is the convenience it gives. Instead of paying dozens of creditors, you take one massive loan, then pay off all your accounts. A single payment is done once a month.
However, convenience does not equate savings. Interest rates are considerably high for debt consolidation loans, so you have to make sure that you understand every single detail about this particular kind of loan. Most debt consolidation loans don’t offer the lowest available rates. Also, when there is no assurance that the loan is secured with collateral like your house, you can expect that the rates will significantly become higher. This is one of the potential dangers of debt consolidation because you will not be saving at all, for the little convenience you are getting.
Managing the Dangers of Debt Consolidation
Managing finances is the best way to avoid the dangers of debt consolidation. It is a useful tool if you are responsible and disciplined enough to manage it and avoid further debt from accumulating. Discipline can go a long way, and that can lead you to a well-deserved, debt-free living.
Once you conquered your financial fears and attained financial stability even if you have debt, you have the empowerment and responsibility to keep your finances as stable as possible. This minimizes the chance of history repeating itself, which may lead to unnecessary and avoidable circumstances. Debt consolidation is one of the double-edged decisions that you will encounter in your financial life, so you have to use it well and make it work for you.